Microfinance – the next big thing?

Helping people help themselves – is it the solution to our world’s problems?

2005 is the International year of Microcredit and rightly so. The importance of microfinance for the underdeveloped or developing world is not often understood well enough. There is an old adage that says give a man a fish and he eats for one day. Teach him how to fish and he will eat forever. Arguably, Microfinance is not analogous to teaching someone how to fish. But it sure can be compared to giving them a fishing rod.

Microfinance is not new and there are several microfinance institutions. But not nearly enough. Most of the non-profit organisations in the world focus on giving out ‘aid’ not ‘resources’. When someone gives out aid, it is a one-time affair, but resources can be reused and promotes entrepreneurship.

The idea of Microfinancing is to treat those who may need resources not as ‘poor’ who need charity, but those who can reach a reasonable purchasing power and contribute to our economy, if only we could lend them an initial helping hand. In “The fortune at the bottom of the pyramid“, C.K. Prahlad, discusses in detail the growing importance of the BOP segment, whom he defines as the 4 billion people in the world, who earn less than 2USD a day.

And don’t think of this as charity. This is an untapped market and multinational organisations will only have themselves to blame if they choose to ignore it. Governments have to rethink their ways and come up with innovative ways of protecting the needy, without hindering their progress. To cite a simple example, many developing countries have ceilings on the interest rates for microcredit loans. Sure, it helps to protect the poor from loan sharks, but more often it keeps creditors away, because there isn’t enough margin to cover the risk. Regulators need to think more long term and come up with more sustainable models. Non-governmental organisations have a very important part to play too. For decades, they are the ones who have been in touch with this segment of the market. They are the ones with the right knowledge and know-how. They can lead us in the path of growth and development through micro-entrepreneurship. And most of all, the poor have to help themselves too. There is no help better than self help. The government, companies and NGOs can only extend the hand. Its upto each individual to heave himself out.

Below is a list of useful links:Microfinance gateway has a an active discussion forum about microfinance detailsFriends of women’s world banking is an affiliate of Women’s World Banking whose aim is to empower poor and asset-less rural and urban women, especially in India.CGAP is a consortium of 28 public and private development agencies working together to expand access to financial services for the poor in developing countriesEuropean Microfinance network promotes microfinance throughout Western Europe as a tool to fight unemployment and social exclusion.An interesting article about Impact Monitoring & Assessment of Microfinance in India Village Earth is a consortium for sustainable village-based development.

5 thoughts on “Microfinance – the next big thing?”

Microfinance is a very interesting area. In one sense we have had this in India for a long time – one of the most exploited systems ever – the local money lender. That’s what in effect microfinance is.

The big change that is happening now is the institutionalisation of that activity and thus brining in some amount of accountability and responsibility.

I am looking forward to seeing how it develops.

Here is an interview with Muhammad Yunus of Gramin Bank of Bangladesh, who is in someways credited with popularising this new identity of Microfinance: http://www.pramod.ch/?p=30

Yes, India has always had a good tradition of microfinance – not just the money lenders, but the socially responsible “sahakarana” banks too. But the trend is make its first impacts in many countries in the Africas and other parts of Asia.

I think the Jeffrey Sachs approach epitomizes the problems with microfinancing and poverty alleviation. “If you can’t get rid of poverty in one village, a macro approach to Africa is futile”.

The “fishing rod” example is congruent with giving the locals mosquito nets to control the outbreak of malaria in a village in Kenya. The idea was that if the disease could be irradicated it would automatically increase productivity and improve quality of life. Unfortunately, the locals sold their nets to neighbouring villages and bought food that lasted them 2 days with it. Currently, the Earth Institute is distributing 2 nets per household, one to use, the other to sell.

Most NGO’s are dubbed an “institutional fallacy” so accountability is still the highest mountain to climb. There are a myriad papers from top economists on how to make the aid accountable. In a state with bad governance and corrupt bureaucracy, the problem is worse.